Navigating Mid-Success

When you start a startup, you get pushed off the side of a cliff with a bag of aerospace parts.1 You hope they are the parts for a spaceship, and they look like they might be, but it’s impossible to tell when they’re all in a bag.

So you start figuring out how the parts fit together as you fall. Every once in a while, it turns out you do have the parts for a spaceship—the market is huge, you have a great product, there’s a natural monopoly, and you have a credible path to be the winner. In that case, there’s plenty of advice available for you.

Much of the time, you don’t have the parts to make anything at all, and should just try to hit the ground as gently as possible.

But a reasonable amount of the time, it turns out you have the parts for an airplane. An airplane is still a cool and valuable thing to build, but if you try to fly an airplane to the moon you are going to be in a world of hurt. This is true regardless of how well you build and fly that airplane.

In this case, you can figure out how to go get a new bag of parts (a new market, a new product, a very different strategy, etc.), and keep trying to build a spaceship, or just decide to have a really good airplane. Some people are willing to risk everything they’ve built for the chance to go the moon, and again, there’s plenty of advice out there for those people. But many rational people are happy with the airplane they’ve built, and there’s not much advice about what to do in this situation.

Let’s define a “really good airplane” as a company that has profitability within reach and is on track to be worth $100 million with several more years of hard work. This is nothing to be ashamed of—quite the opposite, obviously. This is a triumph by almost any metric. This is what happens to most very lucky, very smart, very determined people who decide to start a startup and have everything go their way except happening upon a perfect market.

The most important thing to understand is that this is where founders and investors often get misaligned. Many startup investors are looking for spaceships–airplanes don’t matter much to them, though they matter quite a bit to the founders. Your existing investors will usually be willing to take almost any amount of risk to see if you can somehow turn an airplane into a spaceship (but often there’s not much more advice offered than “point your plane at the moon, burn more fuel, and let’s see what happens”).

Be frank and realistic with your existing investors; you will eventually persuade them that a small multiple is better than a loss. The best investors understand how venture investing works and don’t fight over outcomes like this (in fact, many of them will treat you extra-generously in the hopes of funding your next company). But as a general rule, the longer you delude your investors here, the worse shape you’ll be in.

The second most important thing to understand is that raising too much money or raising money at too high a valuation can severely limit your optionality. Very often I’ve seen cases where founders know in their hearts they have an airplane but are able to convince good investors it might still be a spaceship. This really causes a lot of heartache, and often precludes your opportunity for a good acquisition later.

The answer to this is simple in theory but the temptation is difficult to resist in practice. Don’t raise a lot of money at a high price when you think the company is probably not going to increase another 10x in value and you’d be pretty happy selling the company soon. It usually means that you have to change how you run the company, and it may mean that you need to find a path to profitability with the money you currently have. But it’s far less painful to deal with this now rather than putting the company in a position that will preclude the option you think is best.

Finally, you may want to begin to think about how to position the company for an eventual acquisition. Companies get bought, not sold—it’s very difficult to force an acquisition to happen, and nearly impossible if you haven’t built something legitimately valuable (somehow, this fact surprises founders who decide ‘we’d like to get acquired’ almost every time…). But beginning to develop relationships with potential acquirers is a good idea—it usually takes a long time, and personal relationships usually help.

And remember that this is still an outcome to be very proud of. And if you want, you can always start another company. Silicon Valley is filled with people who had one or several mid-success companies before eventually hitting it out of the park.